The fiscal cliff is already in our rearview mirror

Washington is full of drama. Americans are constantly being treated to high political suspense. Whether it’s the scandal ridden death of an ambassador, an outrageous gun dealing policy gone wrong on our southern border, or the spectacle of politicians scurrying frantically at the eleventh hour to raise the federal debt ceiling to keep Uncle Sam running, there is usually no shortage of political theater emanating from the nation’s capital.

At present, the drama centers around the so-called “fiscal cliff” negotiations taking place between the President and congressional leaders. According to the main stream media, the big question is whether Congress and the President can thwart economic catastrophe by agreeing on tax increases on the rich and some spending cuts before a January deadline would automatically terminate Bush era tax cuts and cut military spending deeply, thereby causing an economic crisis.

It’s no secret that the fiscal condition of the United States is apocalyptic. With $16 trillion of current debt and 10s of trillions of dollars more in future unfunded liabilities for Social Security and Medicare, there is no possible way for the United States to ever meet these obligations short of its current strategy of printing money out of thin air. And, of course, that is a financially suicidal option.

The big problem is that the federal budget is inflexible. In Fiscal Year 2011, $2.303 trillion in tax revenue was collected by the federal government. In that same year, the government spent $454.4 billion on interest payments and $2.025 trillion on mandatory spending like Social Security, Medicare, and Medicaid. Thus, money that Uncle Sam was forced to pay out exceeded all revenue collected by $176.4 billion. This doesn’t include discretionary spending like defense appropriations. Mandatory spending and interest payments will only grow as more baby boomers retire and the Treasury goes deeper into debt.

Of course, many progressives believe that all we have to do is raise taxes on the rich to fix our fiscal mess. They argue that tax cuts since the 1980s, which lowered marginal tax rates on the rich from 91 percent to the current 35 percent, are responsible for the national debt. But this is simply not true. A Congressional Research Study found that the 91 percent marginal tax rate on high earners in the 1950s and 1960s produced an effective income tax rate on the top 0.01 percent of only about 45 percent.

Consequently, high rates on the rich did not produce the windfall for the U.S. Treasury that progressives claim. In fact, whether the top rate was 91 percent or 35 percent, federal tax receipts for the last 67 years have changed little, averaging about 17 percent of GDP for the time period.

What proponents of soaking the rich like to ignore about the 1950s and 1960s is the real check on government spending which was the gold exchange standard. They ignore it because they know that if a gold standard were reinstituted in the U.S. it would put a real crimp in their plans to maintain the welfare/warfare state they have built since LBJ.

At the end of the day, the current drama over the approaching fiscal cliff in January is utter nonsense. The fact is we have already gone over the fiscal cliff. Washington is either in denial, won’t admit it, or doesn’t realize it because we haven’t had the hard landing at the bottom of the canyon yet. That will come when interest rates begin to rise and the Fed prints even more money to meet obligations. Then the real drama will begin.